Articles Posted in Construction Contracts

The American Institute of Architects’ (AIA) contract documents, which are generally regarded as the construction industry standards, are updated by the organization every 10 years, and the 2017 update released earlier this year contains considerable changes from the 2007 editions.

The changes in the documents directly impact the roles and responsibilities of each of the parties in construction and design contracts.  Some of the major owner/contractor changes include:

  • New exhibit with comprehensive insurance and bonds provisions that can be attached to many of the AIA owner/contractor agreements.
  • Expression provision in the AIA A201-2017 General Conditions addressing the rights of the contractor and the obligations of the owner in the event of a loss on the project if there is no property insurance procured.
  • New provisions relating to direct communications between the owner and contractor.
  • Revised provisions pertaining to the owner’s obligation to provide proof that it has made financial arrangements to pay for the project and the contractor’s rights related thereto.
  • Simplified provisions for the contractor to apply for, and receive, payments.
  • Single Sustainable Projects Exhibit that can be used on any project and added to most AIA contracts to address the risks and responsibilities associated with sustainable design and construction services.

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LindseyTLehr-200x300The firm’s Lindsey Thurswell Lehr authored a guest column that appeared in the “Board of Contributors” page of today’s Daily Business Review, South Florida’s exclusive business daily and official court newspaper.  The article, which was titlted “Ruling Reinforces Need to Abide by Contracts in Construction Disputes,” focused on a recent Florida appellate court ruling finding that property owners which forgo the contractual mechanisms for resolving construction disputes will not prevail in the state’s courts.  Her article reads:

Strictly adhering to the modus operandi for addressing and resolving disputes that is codified in construction contracts is essential to prevailing in any resulting litigation.

The Florida Third District Court of Appeal recently reinforced the obligation of construction defect litigants to adhere to the terms of their contract, finding that property owners which forgo the contractual mechanisms for resolving disputes will not succeed in Florida’s courts.

The ruling by the Third DCA in the case of Magnum Construction Management v. City of Miami Beach relieved the contractor of liability for alleged safety concerns with a playground that it installed at the city’s South Pointe Park. The appellate panel ruled that the city did not give the contractor the opportunity to fix the purported issues with the playground as required under its contract. Instead, the court stated that the city replaced the playground in its entirety without considering that the safety concerns could have been corrected by the contractor.

dbrlogo-thumb-220x41-94239The court’s decision in this case reinforces the importance of abiding by all contract terms and requirements in construction disputes. Construction contracts often allow the contractor which performed the work to have the opportunity to fix and cure any purported problems and defects. If a property owner ignores this contractual stipulation, as the city of Miami Beach appears to have done in this case, Florida’s courts are very likely to rule against them.

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Stuart Sobel 2013-thumb-180x270-86799Firm shareholder Stuart Sobel authored a guest column that appeared in the May issue of Construction Executive magazine, one of the leading construction industry trade publications in the country.  His article, which was titled “Dispute Review Boards: An ADR Technique That Works,” focused on the use of DRBs for major projects as an effective means to avoid or resolve disputes that may arise during construction.  Stuart’s article reads:

Disputes are endemic to the collaborative nature of construction. It seems prudent to anticipate the disputes, even where the precise nature of the dispute is unknowable, and create a structure for proactively addressing and resolving them when they do arise. Traditional dispute resolution, whether arbitration or litigation, when invoked at the end of the project, takes place too late to save it or get it back on track. Instead, proactive onsite real-time dispute resolution is warranted to protect working relationships, cash flows and schedule progress.

Arbitration has become the preferred alternative dispute resolution forum for resolving construction disputes because it is private, streamlined and presided over by experienced construction professionals.

However, just as with litigation, arbitration only comes into play after a dispute has ripened. The arbitration process usually extracts a considerable toll on the project participants through damaged relationships and expenses. The parties involved are very unlikely to continue doing business together in the future. In addition, discovery in arbitration proceedings is now wider, longer and more expensive, and its growing resemblance to litigation has become unmistakable. Thus, despite its reputation as a cheaper alternative to litigation, arbitration has become more expensive as the process permits more litigation-like discovery, with attendant administrative costs and arbitrators’ fees.

Instead, consider the scenario where an independent person or board, respected by all project participants, is designated in the operative construction contracts to stay abreast of the design and construction and to attend and observe all pertinent meetings (owner/architect/contractor meetings, change order meetings and even important contractor/subcontractor meetings). Through this process, the dispute resolution neutral or, where there is more than one, the Dispute Resolution/Review Board (DRB), can quickly understand theConstruction-Executive-Logo nature and genesis of disputes that are blossoming — before they slow or stop the construction progress.

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MichaelKurzman_59661.jpgThe recent ruling by the Third District Court of Appeal that firm shareholder Michael Kurzman wrote about in the preceding blog post below was the subject of a front-page article in the Oct. 1 issue of the Daily Business Review. The article, which was titled “Third DCA Says Company Can’t Foreclose on Itself,” focused on the tactics used by a Coral Gables developer to attempt to eliminate the claims and liens filed against it by general contractor CDC Builders, Inc.

CDC Builders was represented on appeal by Michael Kurzman, together with John K. Shubin and Deana D. Falce of Shubin & Bass. The South Florida Chapter of the Associated General Contractors also provided an Amicus Curiae brief through Gary Stein of Pecar and Abramson.

The article reads:

. . . [Developer Brian] McBride struggled to repay SunTrust and took an “unusual step” of renegotiating the construction loan, court records show.

As a condition, SunTrust required curtailment payments that reduced its exposure. McBride authorized SunTrust to debit these payments from other accounts he owned or controlled at the bank.

“He specifically directed SunTrust that these payments should not be treated as reductions in the principal amount of the loan, which would have reduced the interest on the loans. Instead, he insisted the payments be treated as junior liens against the property,” Judge Thomas Logue wrote in a Sept. 17 opinion. “He took this unusual step, the SunTrust officials noted, in order to limit the equity available to satisfy the contractor’s construction liens.”

“These statements by SunTrust officials support an inference that McBride was taking affirmative steps for the express purpose of defeating the contractor’s construction liens in the event that a court upheld the liens,” Logue concluded.

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[Development company] Biltmore took one more step in its fight with the contractor.

Even though SunTrust was not marketing the construction loan, a Biltmore affiliate approached the bank to purchase the debt. McBride did not ask for extensions. Instead Biltmore used a new loan from Royal Bank of Canada to purchase the SunTrust loan at full face value in 2010, court records show.

“BSDI was able to obtain this loan although it had no assets,” Logue wrote. “When questioned, McBride could not recall where the collateral or guarantees for the Royal Bank loan originated. He could not recall whether he had guaranteed the $10 million loan.”

Once Biltmore gained control of the note, it moved to foreclose on the property, which would have wiped out secondary liens like the builder’s lien.

“They foreclosed on their own company and loan,” Kurzman said. “They realized they owed my client $2.3 million they didn’t want to pay, and that’s when they got crafty.”

As Michael concluded in his blog post about the case:

“A contrary decision at the appellate level could have proven to be particularly problematic for Florida’s construction industry, as it would have surely led to other developers applying this same scheme in order to terminate construction liens and avoid paying their contractors, subcontractors and material suppliers. Thankfully for CDC as well as for the health of the construction industry in Florida, that will not be the case.”

We congratulate Michael, John, Deana and Gary on this extremely important win for firm client CDC Builders as well as for the Florida construction industry.

Click here to read the complete article in the Daily Business Review website (registration required).

On behalf of my client CDC Builders, Inc., I was very pleased to have served as the company’s lead trial court counsel and appellate co-counsel (special thank you to John K. Shubin and Deana D. Falce with Shubin & Bass, P.A.for all of their hard work on this case) in its recent successful appeal before the Third District Court of Appeal. CDC appealed a trial court’s decision that could have had significant negative implications for Florida’s construction industry. Indeed, we were assisted on the appeal by the South Florida Chapter of the Associated General Contractors in an Amicus Curiae brief, as this case was of critical importance to the construction industry.

In the case of CDC Builders, Inc., v. Biltmore-Sevilla Debt Investors, LLC, the Third District Court of Appeal reversed the lower court’s summary judgment, which allowed a developer (through a newly created, developer controlled entity) to purchase its own construction loan from its lender and foreclose on the loan expressly for the purpose of:

  • eliminating the construction liens filed against it by CDC, and
  • transferring the developers’ only assets (the real property) to the newly created, developer controlled entity.

This had the effect of extinguishing CDC’s construction liens and rendering the developer entities judgment-proof, leaving CDC with no ability to get paid for work performed, while allowing the original developer to obtain ownership of the real property (through the newly created, developer controlled entity) with the benefits of CDC’s unpaid hard work. The trial court found that the developers’ brazen maneuver was legal and allowed for the foreclosure to proceed.

Fortunately for CDC as well as other members of Florida’s construction industry, the Third District Court of Appeal reversed the lower court’s decision and, in so doing, prevented the creation of a new formula for unscrupulous Florida developers to cheat their contractors, subcontractors or material suppliers out of payment for work performed or materials provided.

In this case, Riviera Biltmore, Riviera Sevilla and Riviera Almeria (all mostly owned and controlled by Brian McBride of Riviera Development, www.rivieradevelopment.com) retained CDC to build 25 luxury homes and townhomes on several parcels in the Biltmore Hotel area of Coral Gables. The developers then borrowed $20 million from SunTrust to finance the construction. To initiate the construction loan, SunTrust required that Brian McBride and McBride Family Properties provide personal guarantees. The McBride family (original owners of the NFL’s Cleveland Browns) is a wealthy and successful family with deep roots in Cleveland and Coral Gables.

Consistent with the construction loan documents which limited the number of spec homes that could be built at any one time, the developers directed CDC to begin construction on 8 of the 25 homes. When the economy soured, the developers exercised their contractual right to terminate the contracts for convenience but requested that CDC complete the eight homes under construction. CDC continued working and also presented the developers with a claim for lost profit on the 17 homes that were terminated for convenience, per the terms of the written contracts. To hedge their exposure, the developers began withholding payments from CDC for work being performed on the eight homes under construction. The developers asserted improper billings as a basis for withholding payments. Despite reduced payments and eventual non-payment of its monthly draws, CDC completed the eight homes and obtained certificates of occupancy from the City of Coral Gables.

CDC recorded claims of lien for the unpaid work performed on the constructed homes, and it filed suit seeking money for the work performed and unpaid, money for the lost profits on the homes not constructed, and foreclosure of its construction liens. The construction liens covered the work performed and unpaid on the homes, but they did not cover the claims for lost profits on work not performed, as those items are non-lienable under Florida law.

When the construction loan matured, McBride (as the personal guarantor of the loan) paid curtailment fees from his other companies to SunTrust to extend the loan several times. Then, rather than extending the loan further (which would have had the effect of reducing the loan and increasing equity in the property for the benefit of CDC), the developers took an extremely untoward and questionable next step. McBride created a new LLC owned by other LLCs made up of him and his family members, acquired a new loan from another lender and used the funds to have this new LLC acquire an assignment of the SunTrust construction loan and mortgages for the full amount owed to SunTrust. In internal documents, SunTrust stated that the loan was paid off by the borrower.

3rd district court of appeal.jpgMcBride’s new LLC then held a first priority interest because it had “purchased” the original SunTrust construction loan. McBride’s new LLC then filed a foreclosure action against the developers (McBride’s other developer entities) and CDC in order to eliminate CDC’s liens as subordinate liens, and to transfer the real property (developers’ only assets) to McBride’s new LLC. The trial court found the crafty maneuver to be legal, and thankfully for CDC as well as many other participants in Florida’s construction industry, the appellate court disagreed.

In a lengthy 16-page opinion, the Third DCA stated in relevant part as follows:

“The law does not permit a person to borrow money from a bank, give the bank a mortgage, incur additional liens and junior mortgages on the property, purchase the mortgage back from the bank, and then foreclose on the mortgage for the primary purpose of eliminating the additional liens and junior mortgages . . . [I]nvestors cannot grant mortgages, contract for the improvement of the property mortgaged, and then use a network of companies to purchase and foreclose the mortgage for the primary purpose of extinguishing the construction liens that increased the value of the property. To hold otherwise would undermine the long-standing principle . . . persons cannot do indirectly what they are not permitted to do directly.”

Unquestionably, fairness and justice prevailed in this case. Unfortunately, the developers delayed payment to CDC by years and caused CDC to incur significant attorney’s fees and costs, at great sacrifice, to right this wrong.

A contrary decision at the appellate level could have proven to be particularly problematic for Florida’s construction industry, as it would have surely led to other developers applying this same scheme in order to terminate construction liens and avoid paying their contractors, subcontractors and material suppliers. Thankfully for CDC as well as for the health of the construction industry in Florida, that will not be the case.

A recent ruling by the Fourth District Court of Appeal reiterates that Florida’s courts will favor arbitration when there is a clear arbitration provision in construction contracts, even if the contracts also include a jury waiver provision.In the case of Bari Builders, Inc. v. Hovstone Properties Florida, LLC, a condominium association sued the developer for construction defects, and the developer filed a third-party complaint against Bari Builders (its subcontractor). The subcontract with Bari included both a provision that the parties agreed to binding arbitration to resolve any claim as well as a separate provision stating that “the parties waive the right to jury and agree to determination of all facts by the court.”

Hovstone prevailed in having the trial court find that the jury waiver provision in its subcontract with Bari rendered the arbitration provision ambiguous and unenforceable. 4th DCA photo.jpg The Fourth DCA reversed this decision, finding that under Florida law arbitration is a preferred method of dispute resolution, and all doubt regarding the scope of an arbitration clause should be resolved in favor of arbitration. The appellate panel also found that the two provisions were actually not in conflict, as the jury waiver provision would be applied if the parties waived their right to arbitrate.

The ruling reads:

“The jury waiver language in the subcontract does not render the arbitration provision ambiguous, as the two provisions can be reconciled in favor of arbitration. Read together, the provisions provide that the parties agree to submit any ‘controversy or claim’ to arbitration and, thereafter, any award may be reduced to judgment in court without the right to a jury trial. Additionally, in the event that the parties choose to waive their right to arbitration, the clause provides that any ‘action’ in court will be in the form of a bench trial.”

This recent ruling is another reminder to developers and general contractors of the significance of arbitration clauses in construction contracts and subcontracts, and it highlights the importance of working closely with qualified and experienced legal counsel in order to ensure that the provisions of their subcontracts adhere with those of the primary contracts for all construction projects.

Our firm’s other construction law attorneys and I write regularly in this blog about important legal and business issues that impact the construction industry in Florida, and we encourage industry followers to submit their email address in the subscription box at the top right of the blog in order to automatically receive all of our future articles.

Stuart Sobel 2013.jpgThe firm’s Stuart Sobel played a very important role in helping the builder of the new PortMiami Tunnel, which opened for traffic last month, to resolve a significant dispute and avoid a potentially lengthy delay during construction. Stuart served as the lead legal counsel for tunnel builder Bouygues Civil Works Florida, Inc., and he was instrumental in helping the company to secure a $58.5 million settlement that was the subject of a front-page article in the February 5, 2013 edition of the Daily Business Review.

The article, which was titled “Dispute Resolution Board Reaches Rapid Settlement with PortMiami Tunnel Builder,” read:

“Imagine securing a $58.5 million settlement from a dispute panel that bans lawyers from the room.

That’s the scenario Coral Gables attorney Stuart Sobel faced while representing Bouygues Civil Works Florida Inc., which is constructing the $1 billion tunnel that will connect PortMiami to I-395.

It didn’t surprise Sobel — he helped set up the tunnel’s Technical Dispute Resolution Board when his client won the project.”

The report chronicled how Stuart devoted many hours to preparing for the hearings on liability before the Technical Dispute Resolution Board outside of normal schedules.

dbr logo.jpg“My work was at night, trying to anticipate the issues that were going to be discussed the next day,” he was quoted as saying in the article, which continued to read:

“For the board presentation, Sobel put together PowerPoint presentations for his witnesses to use and coached them on how to answer the panel’s anticipated questions. The board heard evidence for 13 days before making its decision largely in favor of Bouygues.”

The article explained that the tunnel dispute was over extra work for grouting the limestone as the company dug. “We determined there was a changed condition. The geologic conditions were different than what we’d been led to expect,” Stuart noted.

Stuart is also quoted discussing the merits of using Technical Dispute Resolution Boards for major construction projects. “The concept is you have construction people dealing with construction problems,” he said.

On behalf of all of the attorneys and professionals at our firm, we congratulate Stuart on his work in helping the builder of this vital new infrastructure project for South Florida to quickly resolve this dispute and avoid a delay. Click below to watch a remarkable time lapse video that illustrates the extraordinary work that went into the construction of the new PortMiami Tunnel.

Florida’s Second District Court of Appeal recently issued an important opinion in the case of Snell v. Mott’s Contracting Services, Inc., over the issue of lien rights and the differences between arbitration and litigation.

The case involves a construction contract between homeowners and a contractor that included a provision calling for disputes to be resolved through arbitration. When a dispute arose, the contractor recorded its claim of lien, and the homeowners filed a lawsuit asking the court to determine that the lien was invalid. The contractor responded by asking the court to stay the litigation and compel the parties to arbitration, as stipulated under the contract, and the court agreed.

After the arbitration proceeding, the arbitrator found in favor of the contractor and determined that it was entitled to recover its attorney’s fees in accordance with the Florida Construction Lien Law.

2dca.jpgHowever, the appellate court found that the contractor did not bring an action “in a court of competent jurisdiction” within one year of recording its lien as required under the lien law because it had requested to have the dispute resolved through arbitration. The appellate panel found that the contractor’s rights under the construction lien law had expired, and it now had no legal basis for recovering its attorney’s fees.

Arbitration has become a popular and effective alternative to litigation in the construction field, and this recent decision now calls into question how contractors and other lienors in the industry can protect themselves if they turn to arbitration to resolve a dispute as stipulated by their contracts. Given this ruling, lienholders would now be well advised to first file an action in a court of competent jurisdiction within a year and promptly request that the court stay the proceedings so that the parties can turn to arbitration to resolve the dispute. Otherwise, they may risk losing their right to recover fees or even enforce a lien.

The Insurance Services Office (ISO), which issues forms widely used in the construction industry, released a new additional insured endorsement form on April 1, 2013 to be appended to Commercial General Liability (CGL) policies. The new form includes a number of provisions of which members of the construction industry should be aware.

Coverage Limited by Contract

The new form provides that both the scope and amount of coverage will be limited to that required by the underlying contract. Therefore, if the policy provides $10 million of liability coverage, but the contract, for example, between owner and contractor requires contractor to provide owner with coverage as an additional insured in an amount of $1 million, the owner is only insured for $1 million irrespective of the limits of the policy. Additionally, if the contract specifically prescribes the scope of coverage which the contractor is to provide that is narrower than the coverage afforded under the policy, the contract scope governs.

Finally, under the new endorsement, coverage is limited to the “extent permitted by law.” Consequently, if the indemnity required by the contract is limited or otherwise extinguished for a failure to comply with Fla. Stat. 725.06, insurance coverage may be jeopardized as well.

Insurance related issues are common on construction projects. When issues or doubts exist as to the coverage your firm enjoys, it is best to contact a qualified attorney to review the policies at issue and advise you of the rights you do and do not enjoy.

A 5-2 majority decision by the Florida Supreme Court in the case of Tiara Condominium Association v. Marsh & McLennan limits the legal principle known as the “economic loss rule” only to product liability cases, thereby allowing many claims for breach of contract in the state to be accompanied by tort claims of negligence. The ruling allows the association to proceed with its lawsuit seeking to recover approximately $50 million in damages from its insurance broker, which it claims knew the 42-story oceanfront tower on Singer Island in Palm Beach County was underinsured and failed to tell the association.

The lawsuit stems from the more than $100 million in damages that the luxury condominium tower sustained as a result of two hurricanes in 2004. After settling with the insurance company for $89 million, the association then sued the broker for the remaining balance of the approximately $140 million in repairs, claiming breach of contract, negligent misrepresentation, breach of the implied covenant of good faith and fair dealing, negligence, and breach of fiduciary duty. The trial court in 2009 dismissed the lawsuit, and the association assessed each owner between $110,000 and $150,000 for the repairs and filed an appeal. The Eleventh Circuit Court of Appeals concluded that judgment in favor of the broker was proper as to the breach of contract, negligent misrepresentation and breach of implied covenant of good faith and fair dealing claims. However, as to the negligence and breach of fiduciary duty claims, a matter of state law, the Eleventh Circuit Court of Appeals directed a certified question to the Florida Supreme Court which restated the certified question as follows:

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Does the economic loss rule bar an insured’s suit against an insurance broker where the parties are in contractual privity with one another and the damages sought are solely for economic losses?

The majority opinion found that the economic loss rule did not bar the community association’s lawsuit, and held that the economic loss rule only applies in the products liability context.

The legal principle of the economic loss rule originated as a means of limiting potentially unbounded losses based on a customer’s expected profits from the use of a product that turned out to be defective. The most oft-cited case originating the rule involves a delivery company that sued a truck manufacturer for its lost profits resulting from a truck’s defects that caused it to cease functioning. The court ruled that damages for lost profits and for money paid on the purchase price were appropriate under breach of warranty. However, the delivery company could not pursue the same claim in tort since it suffered only economic loss. The court reasoned that contract law was best to resolve economic losses as the parties are able to negotiate remedies for nonperformance. Tort law was more appropriate to address personal injury and damage to other property. Each state addresses the economic loss rule differently and Florida, while initially expanding the economic loss rule, began limiting the economic loss rule to its principled origins. With this decision, the Florida Supreme Court has now returned the economic loss rule to its original application and has limited it to products liability cases.

The dissenting opinion asserts that the majority expanded the use of “tort law at a cost to Florida’s contract law.” The number of tort claims will likely increase as a party may bring tort claims along with its breach of contract claim and recover remedies that may not otherwise be available under the contract. Our construction law attorneys write regularly in this blog about important business and legal matters for the construction industry in Florida, and we encourage industry followers to submit their email address in the subscription box at the top right of the blog in order to automatically receive all of our future articles.